Target Architecture for Stress Testing (North America)

ByMaría C. Cañamero, Alex Kang

The Target Architecture for Stress Testing diagram illustrates the building blocks of a sound enterprise-wide stress testing system. The architecture highlights the need for a solution that will facilitate systems and models integration, data flow coordination, and automated reporting.

Figure 1. Target architecture for stress testing

Source: Moody's Analytics

This data management platform is designed to provide the infrastructure needed to implement a world-class stress testing framework by managing and centralizing all data required for the CCAR. In preparing for the CCAR exercise, many banks struggle with pulling the necessary data from various source systems deployed for originating loans, deposits, etc. In some cases, the data is missing, forcing banks to revisit the data management process to capture the data required by the Fed.

2. Stress testing engine

The stress testing engine enables bankers to perform the calculations required to forecast expected losses, impairments, and other income and losses indicators under stress conditions. This integrated engine allows for analysis and reporting according to the scenarios put forth by the Fed as well as scenarios associated with the bank’s capital plan.

3. Scenario management module

This module enables bankers to define custom scenarios and leverage pre-defined macroeconomic scenarios, including regulatory scenarios. One hurdle many banks face is applying the economic scenarios to the market data in an integrated manner. Since the capital markets live within the economic scenarios, application of the scenarios should be included in the market data as well in order to be consistent with the economic scenarios.

4. Stress testing workflow module

This workflow includes automated software and reporting tools designed to streamline the CCAR and enterprise-wide stress testing process. Banks face a common challenge of documenting the workflow, as well as versioning and auditing the data, so that it is consistent and persistent (by associating a time series with the data).

5. Model deployment interface

This interface enables bankers to deploy the models required to conduct stress tests.

6. Regulatory reporting engine

Regulatory reporting tools streamline and facilitate regulatory and business reporting by capturing, consolidating, and reporting the data. Ideally, the tools are based on templates that reflect the requirements of the regulators. The expectation is that over time these requirements will become more complex and will require an infrastructure to support these ongoing changing rules.

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Explores how North American financial institutions can leverage stress testing regulations to add value to their business, for compliance and beyond.

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